Regulatory: SEC enters into its first NPA for FCPA violations

The Foreign Corrupt Practices Act (FCPA) has been a focus of federal regulation and enforcement. The Securities and Exchange Commission (SEC) recently entered into its first nonprosecution agreement (NPA) for FCPA violations. This NPA reinforces the importance of strong compliance programs and provides important guidance.

On April 22, the SEC announced it had entered into a NPA with Ralph Lauren Corp. in connection with certain unlawful payments made by a foreign subsidiary to government officials in Argentina from 2005 to 2009. According to the NPA, the corporation’s Argentine subsidiary paid “bribes” in violation of the FCPA to government and customs officials to improperly secure the importation of the corporation's products into Argentina. The unlawful payments were made through a “customs broker” and totaled $593,000.

The NPA notes that the unlawful payments occurred during a period when the corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The company discovered the misconduct in 2010 as a result of measures it adopted to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina. The NPA further notes that the SEC determined not to charge the corporation in light of several factors including the company’s prompt reporting of the violations on its own initiative; the completeness of the information it provided; and the company’s extensive, thorough and real-time cooperation with the SEC’s investigation.

In parallel criminal proceedings, the Justice Department also entered into a NPA with Ralph Lauren under which the company will pay an $882,000 penalty.

NPAs are part of the Enforcement Division’s Cooperation Initiative announced in 2010. Prior to 2010, the SEC did not enter into NPAs or deferred prosecution agreements (DPAs). The purpose of the Cooperation Initiative was to give the commission the flexibility to incentivize and reward cooperation while at the same time ensuring that cooperators are held accountable for their misconduct. Since 2010 and prior to this instance, the commission has entered into three NPAs and two DPAs. It is likely that the SEC will continue to use DPAs and NPAs in particular in FCPA matters given the factual complexity of the cases and the difficulty in discovering violations which almost always occur outside the U.S.

The Ralph Lauren NPA provides useful guidance as to what the SEC will consider in assessing corporate cooperation by detailing the significant actions taken by the corporation. According to the NPA, the corporation reported preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts. It also voluntarily and expeditiously produced documents, provided English-language translations of documents to the staff, summarized witness interviews that the company’s investigators conducted overseas and made overseas witnesses available for staff interviews in the U.S. The corporation also entered into tolling agreements. Otherwise, the statute of limitations with respect to the earliest conduct would have likely run just as the company reported the violations to the SEC.

The NPA provides several other takeaways. First, Ralph Lauren agreed to enter into the NPA “without admitting or denying liability.” The inclusion of this language seems to run counter to the policy the Enforcement Division announced in January 2012 to eliminate the use of “neither admit nor deny” language from settlement documents involving parallel criminal convictions, NPAs or DPAs. This may suggest that the language remains negotiable.

Second, under the agreement, Ralph Lauren must seek the staff’s prior approval of any press release concerning the NPA. Third, the corporation has ceased retail operations in Argentina and is winding down all operations there, which may have been a significant factor in the SEC’s decision to use a NPA. Fourth, notably, the NPA does not require Ralph Lauren to retain an independent consultant to review its policies and procedures and to prepare a report to the staff regarding any findings. The financial burden of independent consultant reviews is often significant. The staff’s willingness to forego such an undertaking demonstrates the value of taking quick and full remedial action during an investigation.

Fifth, the NPA refers to “gifts,” such as perfume, dresses and handbags, which were provided to government officials. This underscores the importance of having policies and procedures that extend beyond prohibiting monetary payments to government officials. Finally, the NPA requires the corporation to disgorge $700,000, which appears to be the total amount of unlawful payments plus interest made, rather than any profit earned as a result of the unlawful payments. Disgorgement calculations are frequently difficult, especially in FCPA cases. It appears that rather than tracing the unlawful payments to profits, the SEC was satisfied to use the amount of unlawful payments as a proxy for disgorgement.